Banks can cut rates in current policy framework: RBI

Chakrabarty has urged companies to seek lower interest rates from banks rather than approach the central bank for further easing of the monetary policy. Photo: Abhijit Bhatlekar/Mint

Updated: Wed, Nov 21 2012. 01 22 PM IST

New Delhi: Banks can further reduce interest rates within the current monetary policy framework, but are penalizing good borrowers because of rising bad debts, said K.C. Chakrabarty, deputy governor at Reserve Bank of India (RBI).

“If 5% NPA (non-performing assets) becomes 1% NPA, banks will be able to reduce rates. A well, timely paying borrower is compensating for the borrower who has defaulted,” he said, addressing a seminar organized by the Associated Chambers of Commerce and Industry of India.

More bank debts are turning sour mainly as industrial borrowers struggle with the slowing economic growth, which eased to a nine-year low of 5.3% in the quarter ended March before picking up slightly to 5.5% in the three months ended June. High interest rates have also contributed to loan defaults.

Chakrabarty urged Indian companies to seek lower interest rates from banks than approach the central bank for further easing of the monetary policy.

“If policy rates are brought down, it doesn’t necessarily mean that the corporate sector will get cheaper credit. Banks should improve their efficiency, which will bring down costs and enable banks to lower rates,” he said. “With the same level of inflation, banks can reduce interest rates if they bring down overhead costs. Banks have made a lot of investment in technology, but transaction costs have not come down.”

On inflation, the deputy governor made a case for bringing down core manufacturing inflation, as agricultural prices are unlikely to ease. “Core inflation has to come down to 1% from around 5% now for any visible impact on inflation,” he said.

Chakrabarty disagreed with the argument that higher interest rates are the main reason for the slowdown in the economy, but accepted that “to the extent monetary policy is not able to control inflation, yes it’s RBI’s responsibility”.